Nashville office rents not high enough for building on spec

Mar. 4, 2014

In its most recent Nashville office market report, Eakin Partners included a rendering of the office building it has long planned at 1201 Demonbreun St., citing hopes of starting construction as soon as a few lead tenants are secured.

Already, there was chatter in local real estate circles about a potential July 1 start to construction — sparked by contractor Brasfield & Gorrie updating its estimates of potential costs. “We’re hopeful, but again it all comes down to getting tenants signed up,” Eakin President Barry Smith said, citing talks with prospects for the 275,000-square-foot, 15-story building planned next to where the new Twelve Twelve residential tower is going up in the Gulch.

That cautious tone reflects how despite all the talk about the tight inventory of first-class office space in Nashville, chances of a new office building being built without tenants remain slim. “We don’t really see anything else on the horizon,” said Tom Frye, Nashville office managing director with CBRE.

One reason is that rents haven’t risen high enough to justify the risk inherent in a new building without tenants signed for part of the space. Typically, lenders require that at least 50 percent of a building be preleased.

“If you had to carry that building for two years before it carried itself, you’re not getting a high enough rent premium to reimburse yourself for your out-of-pocket expenses of the building,” Frye said, citing interest costs and costs for utilities and security as examples. “If rents are high enough that your margins are wider, then you can afford to carry that building longer.”

One factor working in Eakin’s favor is that the firm has already recouped its cost of buying the land. After paying roughly $6 million for 3.5 acres, Eakin has sold off two parcels — the site where Twelve Twelve is going up and another piece of property across the street — for a total of $6.25 million. That could make a project easier to finance, because the developer won’t need to borrow to acquire the site.

That site where Eakin’s 1201 Demonbreun building is planned isn’t far from where MarketStreet Enterprises has started construction on Gulch Crossing after securing tenants for a portion of the 205,000 square feet of office space planned along with 19,000 square feet of retail space and a 750-space parking garage.

In Cool Springs, developer Pat Emery is building 10-story, 272,720-square-foot One Franklin Park, the first office building within the planned Franklin Park development, without a tenant in hand. Frye said Cool Springs in the only local market where developers can build speculatively with confidence that leasing is going to happen fast enough. Still, he doesn’t expect another office building to get started in that submarket until Emery secures tenants.

Although spec buildings aren’t expected in Nashville, several built-to-suit projects are planned, including new headquarters for subsidiaries of the HCA hospital chain at the Capitol View site in the Gulch that Boyle Nashville is helping Northwestern Mutual develop. HCA’s project comes on the heels of build-to-suit projects in Brentwood for new headquarters for LifePoint Hospitals Inc. and Tractor Supply Co.